February 25, 2021

FDIC: Bank Profits Rise In Fourth Quarter, Full Year Income Declines

FDIC-insured banks and savings institutions earned $59.9 billion in the fourth quarter of 2020, a 9.1% increase from the year prior, but full-year net income declined 36.5% to $147.9 billion, the Federal Deposit Insurance Corporation reported in its Quarterly Banking Profile. FDIC Chairman Jelena McWilliams said that “while banking industry income for the full year 2020 declined from full year 2019 levels, banks remained resilient in fourth quarter 2020, consistent with the improving economic outlook.”

The average net interest margin fell by 60 basis points year-on-year in the fourth quarter to 2.68%, matching the third-quarter record low level. As a result, net interest income fell 3.9% year-on-year to total $131.3 billion, the fifth consecutive quarter that net interest income declined. However, noninterest income increased 6.5% year-on-year to $70.3 billion due in large part to growth in net gains on loan sales, as well as net gains on sales of other assets. Average return on assets was 1.11%, down eight basis points from a year ago. Community banks reported a 21.2% increase in fourth-quarter net income year-on-year, the FDIC said.

“Industry earnings, though down considerably for the year as banks braced for the recession, recovered for three consecutive quarters following sharp declines in the first three months of 2020,” noted American Banker Association BA Senior Economist Rob Strand. “While total bank lending ticked down slightly in the fourth quarter, it increased 3.3% for the year, bolstered by strong growth in commercial and real estate lending that was partially offset by declines in credit card use.”

He added that “the unprecedented inflow of deposits — up 22.6% over 2020 — continued in the fourth quarter. This is largely due to consumers and businesses seeking the safety and security of banks as well as cash infusions from federal stimulus programs.”

Meanwhile, quarterly provisions for credit losses were down 76.5% from a year ago to $3.5 billion, the lowest level since the second quarter of 1995. The average net charge off rate declined by 13 basis points year-on-year to 0.41%, and the noncurrent loan rate rose one basis point to 1.18%. During the fourth quarter, three new banks were added, and two banks failed. The number of banks on the FDIC’s problem bank list was unchanged from the prior quarter at 56.

Fed: Banks Remain Resilient Amid Ongoing Pandemic Challenges

The nation’s banks “remain resilient” amid ongoing pressures brought on by the pandemic, the Federal Reserve said in its semiannual monetary policy report. The Fed noted that bank profitability and capital positions improved in the second half of 2020, citing lower-than-expected losses and an improved economic outlook, among other things.

Credit continued to flow to households and businesses and while the Fed observed “substantial” tightening of lending early in 2020, it moderated in the second half of the year. “In the small business sector, privately financed lending also picked up over the summer, and loan performance improved, supported by the Paycheck Protection Program,” the report said. “Nevertheless, credit availability for small businesses remains fairly tight, demand for such credit is weak, and default risk is still elevated.”

The Fed also flagged a need for “structural reforms” to money market mutual funds and open-end investment funds, which experienced extreme volatility in the early days of the pandemic. Without such reforms, these vulnerabilities “will persist and could significantly amplify future shocks,” the report said. 

ABA, Trade Groups Urge Congress To Shield EIPs From Garnishment

As Congress considers an additional COVID-19 rescue bill, the American Bankers Association has joined a coalition of 17 other trade groups calling on lawmakers to include language in the bill to ensure that any economic impact payments will be protected from assignment or garnishment. Without this language, the groups warned that financial institutions would be required to comply with court-ordered garnishments, which could prevent relief from reaching families in need.

“While depository institutions and even many debt collectors and debt buyers believe that economic impact payments should be exempt from garnishment orders, depository institutions are obligated to comply with court orders, and unless Congress includes the attached language, they will be forced to pay some creditors who attempt to garnish and freeze bank accounts,” the groups said. “We believe it is imperative that Congress ensure that these next stimulus payments are treated as ‘benefits’ subject to the federal exemption from garnishment. Otherwise, the families that most need this money — those struggling with debt and whose entire bank accounts may be frozen by garnishment orders — will be not be able to access their funds.”

FinCEN Issues Advisory On EIP Fraud

The Financial Crimes Enforcement Network issued an advisory alerting banks to economic impact payment fraud. The advisory describes EIP fraud, associated red flags and how to report suspicious activity.

Authorities have detected a wide range of EIP-related fraud, according to the advisory, including fraudulent checks, theft of EIPs and phishing schemes using EIPs as a lure where fraudsters use emails, letters and phone calls about the payments to get personal information like account numbers and passwords.

FinCEN also issued a companion notice for filing suspicious activity reports related to COVID-19. The notice is part of a series released by FinCEN about COVID-19 related threats and includes key terms to use when filing SARs about pandemic related activity.

ABA Urges Interagency Coordination On SAR Exemption Rules

The American Bankers Association urged the federal banking agencies to pursue a single interagency rulemaking instead of finalizing separate regulations regarding Suspicious Activity Report exemptions. ABA wrote that “the issuance of separate, similar compliance requirements can lead to disparities in interpretation and create unnecessary burdens through those disparities.”

A recent Financial Crimes Enforcement Network rule authorized an exemption for innovative solutions to SAR monitoring and filing, but the agencies’ current rules do not offer a similar exemption, ABA wrote. “As a result, if FinCEN grants a special exemption when approving an innovative solution to [Bank Secrecy Act] compliance, a bank that uses that innovation could be cited by its prudential regulator for not complying with the banking agency’s rule,” the association pointed out. The agencies issued their proposals to coordinate with the FinCEN rule, a step which ABA supported.

ABA also recommended that banks be required to file only one request for an exemption to their prudential regulator. The banking agencies should then coordinate with FinCEN about the application, the association said. ABA also urged the agencies to include specific procedures to apply for the exemption, especially a timeline for the agencies to respond to requests.

CFPB Issues Statement On QM Rule Compliance Deadlines

As the Consumer Financial Protection Bureau considers whether to revisit its recent final rules regarding the definition of Qualified Mortgage and the establishment of a “seasoned QM” category of loans, it issued a statement addressing the compliance deadlines associated with these rules. The statement also addresses the temporary “GSE patch” that was set to expire on the compliance date of the General QM final rule.

“The bureau is considering whether to initiate a rulemaking to revisit the Seasoned QM Final Rule,” the statement noted. “If the bureau decides to do so, it expects that it will consider in that rulemaking whether any potential final rule revoking or amending the Seasoned QM Final Rule should affect covered transactions for which an application was received during the period from March 1, 2021, until the effective date of such a final rule.”

In addition, the bureau said that it “expect to issue shortly a proposed rule that would delay the July 1, 2021 mandatory compliance date of the General QM final rule.” Creditors would then be able to use “either the current General QM loan definition or the revised General QM loan definition for applications received during the period from March 1, 2021, until the delayed mandatory compliance date,” the CFPB said. The GSE patch also would remain in effect until the new mandatory compliance date, or until the GSEs exited conservatorship prior to that date.
CFPB Acting Director Dave Uejio discussed the QM rule in a blog post. In addition, the CFPB also updated its small entity compliance guide and other compliance aids on the QM rule.

Regulators Propose Call Report Revisions

The Federal Financial Institutions Examination Council proposed several temporary changes to the call report to provide relief to banks with under $10 billion in assets. The changes apply to three versions of the Call Report — FFIIEC 031, FFIEC 041 and FFIEC 051 — and will allow banks to use the lesser of the total consolidated assets reported in its call report as of Dec. 31, 2019, or June 30, 2020, when determining whether the institution has crossed certain total asset thresholds to report additional data items in its call reports for report dates in calendar year 2021.

These thresholds include the $5 billion threshold for limiting eligibility to use the FFIEC 051 version of the call report and the $100 million, $300 million, $1 billion and $10 billion thresholds for reporting certain additional data items in the call reports. This relief will be allowed only for the calendar year 2021.

The agencies also will permit banks that temporarily exceed the $10 billion total asset threshold to use the community bank leverage ratio framework in Call Report Schedule RC-R from Dec. 31, 2020, through Dec. 31, 2021, provided they meet the other qualifying criteria for this framework. Comments on the call report changes will be accepted for 60 days. 

Powell: Fed Weighing Pros, Cons Of Digital Dollar

The Federal Reserve is “looking very carefully” at whether and how it might issue a digital dollar, Fed Chairman Jerome Powell told members of Congress this week. In testimony before the Senate Banking Committee, Powell noted that it is “something we are investing time and labor in across the Federal Reserve System,” and that as the issuer of the world’s reserve currency, “we have a responsibility to get this right.”

Powell pointed out that “there are significant technical and policy questions” that the central bank is considering, and that the Fed is “committed to solving the technology problems and consulting very broadly with the public and very transparently with all interested constituencies as to whether we should do this.”

He also noted that the Fed would carefully weigh potential benefits of a digital dollar — such as helping to promote financial inclusion—against potential implications for the banking system. “You want to avoid creating things that might be destabilizing or draw funds away from the banking system,” Powell said. “We have a banking system that intermediates between savers and borrowers. We want to be careful about what the implications are.”

Among other things, Powell also discussed climate change and shared his views on whether standardized climate-related disclosures may be appropriate. Powell acknowledged that “financial institutions everywhere … are working hard on this question.” Regarding the voluntary and variable nature of current climate disclosures, Powell said that “it’s appropriate to allow some of that difference to persist for now,” but signaled that “in the long run, we have to be going in the direction of more standardization.”

FDIC Releases Technical Assistance Videos On Fair Lending

The Federal Deposit Insurance Corporation has released nine technical assistance videos on fair lending, which are intended to help FDIC-supervised banks assess and mitigate fair lending risk and understand how examiners evaluate fair lending compliance.
The videos include an overview of fair lending laws and regulations for bank directors and senior managers. Other videos, which are geared toward bank management and compliance staff, address how a bank’s compliance management system can mitigate fair lending risk, how FDIC examiners evaluate fair lending risk during a consumer compliance examination and specific fair lending risk factors.

New York Fed To Host DEI Webinar

The Federal Reserve Bank of New York will host a webinar at 8 a.m. Monday, March 1, on diversity, equity and inclusion, as part of a series focusing on culture. The webinar will feature remarks from N.Y. Fed President John Williams and a panel discussion with industry experts including Goldman Sachs Chief Diversity Officer Erika Irish Brown, who will explore questions related to how and why norms and biases change, the role of leaders and institutions in driving that change, and why motivations matter.

Next DEI Open Forum Scheduled For March 16

The American Bankers Association will host another free open forum on diversity, equity and inclusion in the banking industry at 2:30 p.m. Tuesday, March 16, for bankers to discuss current DEI challenges and topics, exchange leading practices and ideas and learn more about implementing DEI programs and initiatives at individual banks. 

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